It is wrecking the government of Mexico. It is financing the Taliban in Afghanistan. It is throwing 11,000 Britons into jail. It is corrupting democracy throughout Latin America. It is devastating the ghettoes of America and propagating Aids in urban Europe. Its turnover is some £200bn a year, on which it pays not a penny of tax. Thousands round the world die of it and millions are impoverished. It is the biggest man-made blight on the face of the earth.

No, it is not drugs. They are as old as humanity. Drugs will always be a challenge to individual and communal discipline, alongside alcohol and nicotine. The curse is different: the declaration by states that some drugs are illegal and that those who supply and use them are criminals. This is the root of the evil.

By outlawing products – poppy and coca – that are in massive global demand, governments merely hand huge untaxed profits to those outside the law and propagate anarchy. Repressive regimes, such as some Muslim ones, have managed to curb domestic alcohol consumption, but no one has been able to stop the global market in heroin and cocaine. It is too big and too lucrative, rivalling arms and oil on the international monetary exchanges. Forty years of "the war on drugs" have defeated all-comers, except political hypocrites.

Most western governments have turned a blind eye and decided to ride with the menace, since the chief price of their failure is paid by the poor. In Britain Tony Blair, Jack Straw and Gordon Brown felt tackling the drugs economy was not worth antagonising rightwing newspapers. Like most rich westerners they relied on regarding drugs as a menace among the poor but a youthful indiscretion among their own offspring.

The full horror of drug criminality is now coming home to roost far from the streets of New York and London. In countries such as Afghanistan, Pakistan and Iran, drugs are so endemic that criminalising them merely fuels a colossal corruption. It is rendering futile Nato's Afghan war effort, which requires the retraining of an army and police too addicted either to cure or to sack. Poppies are the chief source of cash for farmers whose hearts and minds Nato needs to win, yet whose poppy crop (ultimately for Nato nations) finances the Taliban. It is crazy.

The worst impact of criminalisation is on Latin America. Here the slow emergence of democratic governments – from Bolivia through Peru and Columbia to Mexico – is being jeopardised by America's "counter-narcotics" diplomacy through the US Drug Enforcement Agency. Rather than try to stem its own voracious appetite for drugs, rich America shifts guilt on to poor supplier countries. Never was the law of economics – demand always evokes supply – so traduced as in Washington's drugs policy. America spends $40bn a year on narcotics policy, imprisoning a staggering 1.5m of its citizens under it.

Cocaine supplies routed through Mexico have made that country the drugs equivalent of a Gulf oil state. An estimated 500,000 people are employed in the trade, all at risk of their lives, with 45,000 soldiers deployed against them. Border provinces are largely in the hands of drug barons and their private armies. In the past four years 28,000 Mexicans have died in drug wars, a slaughter that would outrage the world if caused by any other industry (such as oil). Mexico's experience puts in the shade the gangsterism of America's last failed experiment in prohibition, the prewar alcohol ban.

As a result, it is South American governments and not the sophisticated west that are now pleading for reform. A year ago an Argentinian court gave American and British politicians a lesson in libertarianism by declaring that "adults should be free to make lifestyle decisions without the intervention of the state". Mexico declared drugs users "patients not criminals". Ecuador released 1,500 hapless women imprisoned as drug mules – while the British government locks them for years in Holloway.

Brazil's ex-president Fernando Cardoso and a panel of his former judges announced emphatically that the war on drugs had failed and that "the only way to reduce violence in Mexico, Brazil or anywhere else is to legalise the production, supply and consumption of all drugs". Last month, Mexico's desperate president, Felipe Calderón, acknowledged that his four-year, US-financed war on the drug cartels had all but failed and called on the world for "a fundamental debate on the legalising of drugs".

The difficulty these countries face is the size of the global industry created by the west to meet its demand for drugs. That industry is certain to deploy lethal means against legalisation, as the alcohol barons did against the ending of prohibition. They have been unwittingly sponsored for decades by western leaders, and particularly by the United Nations which, with typical fatuity, declared in 1998 that it would "create a drug-free world" by 2008. All maintained the fiction that demand could be curbed by curbing supply, thus presenting their own consumers as somehow the victims of supplier countries.

The UN's prohibitionist drugs czar, Antonio Maria Costa, comfortably ensconced in Vienna, holds that cannabis is as harmful as heroin and cocaine, and wants to deny individual governments freedom over their drug policies. In eight years in office he has disastrously protected the drug cartels and their profits by refusing to countenance drug legalisation. He even suggested recently that the estimated $352bn generated by drug lords in 2008-09 helped save the world banking system from collapse. It is hard to know whose side he is on.

The evil of drugs will never be stamped out by seizing trivial quantities of drugs and arresting trivial numbers of traders and consumers. That is a mere pretence of action. Drug law enforcement has been the greatest regulatory failure in modern times, far greater in its impact on the world than that of banking. Nor is much likely to come from moves in both Europe and America to legalise cannabis use, sensible though they are. In November Californians are to vote on Proposition 19, to give municipalities freedom to legalise and tax cannabis. One farm in Oakland is forecast to yield $3m a year in taxes, money California's government sorely needs.

This will do nothing to combat the misery now being visited on Mexico. The world has to bring its biggest illegal trade under control. It has to legalise not just consumption but supply. There is evidence that drug markets respond to realistic regulation. In Britain, under Labour, nicotine use fell because tobacco was controlled and taxed, while alcohol use rose because it was decontrolled and made cheaper. European states that have decriminalised and regulated sections of their drug economies, such as the Netherlands, Switzerland and Portugal, have found it has reduced consumption. Regulation works, anarchy does not.

In the case of drugs produced in industrial quantities from distant corners of the globe, only international action has any hope of success. Drug supply must be legalised, taxed and controlled. Other than eliminating war, there can be no greater ambition for international statesmanship. The boon to the peoples of the world would be beyond price.